The Government’s super reforms certainly have the financial services industry scratching their collective heads. What changes to marketing must be made to continue attracting customers? What new sales strategies will be needed so that prospective clients will see a valuable benefit? What product adjustments are essential to provide a benefit?

The answers to these questions are never easy. The sharp thinkers who spend time understanding how the new laws impact the marketplace get an early break before the majority of the pack reactively catches on.

Which brings us to some interesting thoughts from Kate Anderson who works for the Mariner Financial Group.

Kate is Mariner’s Superannuation and Retirement Strategist and for a while she has been producing some very interesting material about how Self Managed Super Funds may be the main beneficiaries of the Government’s latest super changes. She has two main reasons to back up this theory.

Space only allows us to look at one of them which shows how a high net worth person can use a SMSF to effectively get around the restrictions on undeducted contributions. (A quick reminder on these proposed new rules – between 10 May 2006 and 30 June 2007, all investors will be allowed up to $1 million in undeducted contributions – those people aged at least 65 but under 75 during this period will need satisfy the work test mentioned. From July 2007 onwards undeducted contributions will be limited to $150,000 however investors under 65 will be allowed to contribute three years of undeducted contributions, i.e. $450,000, in advance. People aged at least 65 but under 75 will not be allowed to use the three years in advance rule. Contributions in excess of these thresholds amounts will be taxed at 46.5%. )

Now suppose someone wanted to contribute more than their relevant undeducted contribution threshold but also preferred to avoid the 46.5% tax penalty. Anderson believes that the best way to get around this is to use a SMSF by having the super fund and the member jointly owning an asset. “The law allows joint investing by a super fund and member. There are two ways this can be achieved. Either the fund and the member acquiring the asset as tenants in common. Or alternatively a trust could be settled with units being allotted to the fund and its members in the desired ratios,” she said.

(An investment by a SMSF in a related trust is permissible provided that the related trust does nothing more than the super fund would have been able to do in its own right.)

Which option is better? “Often the unit trust strategy is seen as better because it can be more flexible. If the co-unitholders wish to change their respective ownership proportions, one would simply transfer units to the other. Effectively unit trusts offer a more flexible means by which co-owners' interests can be changed over time,” said Kate.

The appeal of using a SMSF in this manner, rather than investing by way of some other structure such as a retail super fund, is that super and non-super capital can be aggregated at the outset, without the need to split the capital, thus resulting in the ability for the SMSF trustees to fully utilise their funds for investment purposes.

The obvious question to ask is, “Why can’t this be done by other types of super funds?” This is simply not possible because as Anderson points out, “super and non-super capital cannot be aggregated in the retail environment. This strategy is all about fully utilising funds for investment purposes. Only SMSFs can do this.”

Lets look at an example. Suppose someone in July 2007 receives $1 million net of all costs and taxes from the sale of an investment property and would like to contribute this as an undeducted contribution into super. Under the current rules “this would have to be done gradually over a number of years and the investor’s capital would be split with some in super and some held personally during this period,” said Kate.

If, on the other hand, a SMSF were established with a related unit trust, with one million $1.00 units being allotted to the member, the trust would hold the entire capital and be able to invest at the time of the settlement of the inheritance. Over time, the member could transfer the beneficial ownership of their own units in the trust to the SMSF, up to the relevant cap on undeducted contributions.

Whilst the cap on undeducted contributions would limit the amount that could be contributed into the superannuation environment, the member's capital would be fully productive in a single investment and be able to be drip fed into the SMSF.

“The transfer of business real property – that is, property used wholly and exclusively in the running of a business – into a SMSF could be done in much the same way, concluded Anderson.

This is indeed an interesting viewpoint and one that investors with the ability to make super contributions should think carefully about.

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